China is home to hundreds of startups betting on the electric car revolution, but only 1% will be able to survive in an industry that requires significant investment in technology, according to NIO Capital.
The venture capital fund, which is partly backed by Chinese electric-vehicle company NIO, is nonetheless very cautious on buying into EV startups, said Managing Partner Ian Zhu. The Shanghai-headquartered firm is seeking to raise 10 billion yuan (US$1.5 billion) for an onshore fund and favours investing in joint projects between auto startups and traditional carmakers because they combine innovation with real manufacturing capabilities, he said.
“It’s a very complicated system that needs abundant investments and a large group of people to be able to build a car from scratch,” Zhu said in an interview in his Beijing office on Aug 3. “Therefore, the survival rate of all these EV startups will be very low.”
China’s quest to lead the world in cars powered by electricity has enticed investors to pour billions of dollars into startups and production. Emboldened by Tesla Inc.’s still small presence in what is the biggest market for EVs, companies like Xpeng Motors Technology Ltd. and NIO — which is backed by tech giant Tencent Holdings Ltd. — have been racing to gain a foothold.
Most EV startups in China are yet to manufacture on a large scale or be able to deliver cars in bulk to consumers, but that hasn’t stopped the companies from valuing themselves at levels several times the value of traditional Chinese carmakers such as BAIC Motor Corp and Great Wall Motor Co. in recent fundraising rounds.
And competition in China — where more than half of the world’s EVs are sold — is set to intensify, with Beijing’s shift to allow foreign car brands to fully own their local units. Trade tensions between the world’s two biggest economies are also pushing big international carmakers such as BMW AG and Tesla to accelerate their plans to locally produce EV models in China.
The trade war will also create more hurdles to investment in technology, slowing the car industry’s pivot toward self-driving vehicles, according to Zhu.
The fight between the US and China over trade, which has intensified in recent weeks, “is a real obstruction to the global economy and technology development,” he said. “If it continues or escalates, it will delay the commercialization of intelligent electric cars as well as slow down global efforts to improve traffic safety and efficiency.”
As a result, the fund is looking to buy minority stakes in auto-technology companies both in China and overseas, rather than attempt wholesale takeovers. That way, the fund can tap into the rise of electric and autonomous cars, while minimizing the risks that could come from a full takeover, including regulatory resistance on security grounds, he said.
NIO Capital is close to completing the first round of its offshore fundraising of about US$500 million, people with direct knowledge of the matter have said. BP Ventures, a unit of the British oil firm, said last month that it invested US$10 million.
The offshore fund will focus on Chinese auto-related companies as well as overseas firms that plan to grow in China, Zhu said. “We won’t invest in a company that has zero relations with China.”